New accounting rules to expose pension funding gaps

State and local governments will no longer be able to fudge the numbers on their underfunded pensions for workers. Moody's will issue new guidelines to force governments to report their pension obligations more honestly.

For the worst-off cities, the new pension debt calculations could mean bond rating downgrades and increased borrowing costs when localities try to raise money for new projects, Moody's has warned.

The accounting changes themselves will not force policymakers to alter how they fund pensions. But finance experts say that by simply highlighting greater funding gaps, the rules will intensify pressure on state and local governments to allocate more of taxpayers' dollars to their pension funds. More likely, public workers may have to contribute more to their retirements or see promised benefits curtailed, measures that have already been implemented in more than 40 states.

Virginia and Maryland have cut benefits for new hires while preserving retirement packages for current employees.

"It is hard to believe that higher numbers would not put increased pressure on governments to deal with this," said Scott D. Pattison, executive director of the National Association of State Budget Officers. "If you only have so many dollars, if you are going to put more into pensions, that means less for other things."

The new rules come at a difficult time for state and local governments struggling with weakened tax revenue and stronger demand for services in the wake of the recession. In addition, states and localities face the prospect of substantial reductions in aid from the federal government beginning in January unless Congress and the White House come up with an alternative to automatic budget cuts.

The shortfall in pension obligations is more than $2 trillion. That's the amount that taxpayers on are on the hook for unless lawmakers find a way to fix their pension systems. Coupled with a huge increase in retiree medical insurance coverage, cash strapped states and local governments have taken to reducing the benefits of new hires while allowing current employees and retirees to maintain their level of benefits.

It won't be enough to stave off disaster. Eventually, the problem will have to be met head on and the entire pension system reworked.

State and local governments will no longer be able to fudge the numbers on their underfunded pensions for workers. Moody's will issue new guidelines to force governments to report their pension obligations more honestly.

For the worst-off cities, the new pension debt calculations could mean bond rating downgrades and increased borrowing costs when localities try to raise money for new projects, Moody's has warned.

The accounting changes themselves will not force policymakers to alter how they fund pensions. But finance experts say that by simply highlighting greater funding gaps, the rules will intensify pressure on state and local governments to allocate more of taxpayers' dollars to their pension funds. More likely, public workers may have to contribute more to their retirements or see promised benefits curtailed, measures that have already been implemented in more than 40 states.

Virginia and Maryland have cut benefits for new hires while preserving retirement packages for current employees.

"It is hard to believe that higher numbers would not put increased pressure on governments to deal with this," said Scott D. Pattison, executive director of the National Association of State Budget Officers. "If you only have so many dollars, if you are going to put more into pensions, that means less for other things."

The new rules come at a difficult time for state and local governments struggling with weakened tax revenue and stronger demand for services in the wake of the recession. In addition, states and localities face the prospect of substantial reductions in aid from the federal government beginning in January unless Congress and the White House come up with an alternative to automatic budget cuts.

The shortfall in pension obligations is more than $2 trillion. That's the amount that taxpayers on are on the hook for unless lawmakers find a way to fix their pension systems. Coupled with a huge increase in retiree medical insurance coverage, cash strapped states and local governments have taken to reducing the benefits of new hires while allowing current employees and retirees to maintain their level of benefits.

It won't be enough to stave off disaster. Eventually, the problem will have to be met head on and the entire pension system reworked.